Trichet Steadies the EURO For Now

Trichet reinforced his roles disclaimer this morning, noting that his ‘primary mandate is to maintain price stability’. The market acknowledges that they are ‘carefully monitoring’ the situation amid increased inflation risks and bow to the fact that he stands ready to do whatever is necessary. Certainly defiant words from a ‘man of action’ -European politicians should take note.

Policy makers have to avoid commodity price increases becoming entrenched in longer term inflation expectations. They continue to stand by their use of nonstandard measures to fulfill its mandate on price stability, relying on the liquidity provisions and bond purchase programs-it’s good to hear, as global confidence in the Eurozone continues to wane.

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in an ‘orderly’ session.

The market was prepared for a weak April US durable goods number, however a -3.6% was much worse than the perceived -2.2% decline. The broad based nature of the decline suggests the US manufacturing sector has lost significant momentum for the beginning of this quarter. This moderately weaker than expected report, has core-durable goods orders on a weak year-to-date profile (-1.5%).

Digging deeper, elevated inventories relative to sales, suggests further production weakness that is consistent with other reports like softening regional manufacturing surveys. Weakness was widespread, with every major component except for computers posting a contraction in durable goods orders on the month. Non-defense aircraft orders plunged-30%, m/m, the first decline in two months, followed by vehicles and parts (-4.5%), electrical equipment (-4.9%), machinery (-3.4%), primary metals (-1.6%) and fabricated metals (-1.1%). 

The inability of the report to break out domestic and foreign orders inhibits one to tell how much of the weakness is related to Japan.  However, the broad based nature of the decline suggests there is more to it than the temporary Japan related supply disruptions. Higher energy prices may have also taken some momentum from the economy, setting us up for an impressive second quarter.

The dollar is lower the EUR +0.45%, GBP +0.05%, CHF +0.13%, and JPY +0.24%. The commodity currencies are mixed this morning, CAD -0.14% and AUD +0.42%.

The loonie was little changed yesterday, a day after triggering some hefty stop-losses above a psychological option related target of 0.9800. The currency has underperformed on signs of slowing economic growth and reduced speculation that the BoC will resume increasing borrowing costs. For much of this month, the CAD has weakened outright versus the dollar, as crude prices trade heavily amid mounting investor concern that global economic growth is faltering. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9785).

The AUD has risen from its six-week low in the O/N session. With investment still ‘booming’, the currency still looks set to rally. Reports released this morning show that private capital expenditure grew +3.4%, q/q, in March, much stronger than the +2.7% expected. This came on top of an upward revision to fourth quarter from +1.3%, q/q, to +1.5%. Perhaps what is more important for the currency was the Australian Bureau of Statistics having revised up its estimate for growth in capital spending over the next year to +31%. According to analysts ‘this would be one of the fastest private investment growth rates of any OECD or emerging market economy, coming from an already very high base for total investment of +28% of GDP’.

Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0582).

Crude is lower in the O/N session ($100.74 -0.58c). Oil rallied for a second consecutive day after the weekly EIA report showed that US inventories of distillate fuel (diesel and heating oil), plummeted to the lowest level in more than two-years as consumption increased. Earlier this week Goldman and Morgan Stanley increased their oil-price outlooks, providing an undertone bid. Year-to-date, crude prices are up +39%.

Last week’s weekly crude supplies rose +616k barrels to +370.9m. Stockpiles were forecast to decrease by -1.5m barrels. A gentle surprise was gas inventories rising +3.79m barrels to +209.7m, above forecasts for a +300k build. The EIA data showed that gas demand fell over the last month by -2.1%, on average, versus the same period of last year. Distillate stocks fell -2.04m barrels to +141.1m barrels, well below projections for a +100k build. Refinery utilization rose +3.1% to 86.3%, much more than the +0.5% increase investors had expected.

Technically, the report could be seen as overall bullish because of the distillate number. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices. Lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.

Gold rose to a three week high yesterday, on concern that that Europe’s sovereign-debt crisis may worsen and a weaker dollar spurred demand for the metal as an alternative asset. Strong buying recommendations from Goldman and Morgan Stanley was also good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency.

The inability of the dollar to maintain its safe-haven status is currently supporting metals. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,519 -$8.10c).

The Nikkei closed at 9,562 up+139. The DAX index in Europe was at 7,159 down-21; the FTSE (UK) currently is 5,884 up+15. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.13%) and is little changed in the O/N session.

Dealers have wanted to cheapen up the curve ahead of this week’s three auctions as yields continue to hold close to three-year highs, making it difficult for investors to want to own product at these levels. However, after two auctions, product remains in demand.

‘Rates remain in a tight range, and despite seeming incredibly low, they reflect a Fed comfortable with the inflation and economic outlook and their ability to adjust’. Expected mixed US data this week has investors remaining better bid on pull backs, providing bullish momentum for the FI asset class, who it seem want to register even lower record yields over the medium term.

Yesterday’s $35b five-year auction was a strong issue and came to the market 1.45bp through, at 1.813%. Indirect bidders too 47.5% (largest takedown in 2-years) while direct took 38%, with 3.20 bid-to-cover ratio (largest in 14-years). This morning we get the $29b seven-year note. Will the markets appetite be as strong?

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